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Open & Free
September, 18th 2008

When the Companies Bill 2008, which has been passed by the Cabinet, gets the approval of Parliament, it will redefine the way companies will function. It is likely to open up new vistas for foreign investment in India and reduce obstacles in doing business.

The new Bill, which is likely to be tabled in Parliament next month, almost halves the number of clauses in the Companies Act, from the current 800. It will streamline the way mergers and acquisitions take place, and terminate the governments role in the appointment of managing directors and whole-time directors. It will also make it mandatory for a company to have at least one Indian director on its board.

The proposed legislation will also make it almost impossible for companies to raise public deposits and treat insider trading by directors as a criminal offence. Misstating facts in the initial public offer document and fraudulently inducing people to invest by using celebrities will become non-compoundable offences. There will be special courts to deal with offences in relations to amalgamations and mergers, reduction of capital and insolvency related issues.

The proposed new Bill will replace the archaic Companies Law of 1956, which has been amended 23 times. In fact, the ministry of corporate affairs started the process of amending the Act in 2004 by constituting an expert committee under the chairmanship of JJ Irani, director, Tata Sons. This was done since the number of companies has grown from about 30,000 in 1956 to nearly 7 lakh.

Says Ved Jain, president, Institute of Chartered Accountants of India (ICAI), It was the need of the hour to come out with a new legislation as the current law has become obsolete. There has been a lot of change in the way companies function since nineties and the proposed legislation will facilitate faster business decisions.

According to N K Jain, secretary, The Institute of Company Secretaries of India (ICSI), the proposed legislation is a single comprehensive legal framework administered by the government for all aspects of internal governance of corporate entities. The new Companies Bill will encourage foreign investors as it will create an enabling environment and reduce bottlenecks, says Jain.

Its because companies that influence people by using big celebrities to raise money will come under a scanner. Experts say the government is planning to increase the penalty to Rs 50 lakh from the current Rs 1 lakh and may also slap a three-year imprisonment on celebrities. The Bill aims to put in place an effective regime for investigation of companies.

Celebrities offer their names for pecuniary gains and later disown their commitment to the company. Wrongful use of celebrities must stop and ignorant investors must be protected from fly-by-night operators, says a legal expert in the Capital.

There are instances of companies taking advantage of market conditions but later defaulting on commitments made to the public while mobilising funds. Some of these companies simply disappear, cheating the public of money. Both the Companies Act and the Sebi Act are equipped to deal with promoters and companies who cheat the investors.

One of the significant provisions of the new legislation is allowing a single person to form a company. This will open the floodgates of investment by individuals and boost entrepreneurship in the country.

Presently, enterprises are generally incorporated as proprietorships, partnerships, public limited and private limited companies. In the case of limited companies, if the entity is unable to meet its financial obligations, the shareholders are liable to the extent of their investment as share capital in the entity. In contrast, in proprietorships and partnerships, the owners can be held personally responsible for all liabilities incurred by the entity.

Says Jain of ICAI, The provision of one-person company is significant as it will bring in limited liability for the person operating a company.

The new legislation proposes the requirement to appoint independent directors, where applicable, at a minimum of 33% of the total number of directors. In the current law, there are no provisions for the appointment of independent directors. However, under the Clause 49 of Sebis listing agreement, 50% of a companys board has to comprise independent directors. The Bill also mandates that every company have at least one director resident in India. This, says N K Jain of ICSI, will make the company accountable in case the foreign directors abandon a company.

The legislation proposes stringent regime for not-for-profit companies to check misue and no restriction has been proposed on the number of subsidiary companies that a company may have. Its subject to disclosure in respect of their relationship and transactions between them.

In another step forward the new legislation proposes to facilitate joint ventures and relaxes restrictions limiting the number of partners in entities such as partnership firms to a maximum of 100. The Bill recognises insider trading by company directors or key managerial personnel as an offence with criminal liability.

While the new provisions have been made keeping in mind the changing dynamics of todays business, experts feel that the bigger problem would be in terms of monitoring and enforcement of the laws as penalties can be contested in courts and there would be several ways to get away with it. The best way would be to have a mix of rules-based approach and principal-based approach, says Monish Chatrath, partner, Grant Thornton India. But he adds a caveat. An overdue emphasis on either the rules-based approach or the principles-based approach can frustrate the spirit of the legislation.

The Companies Act of 1956 was enacted on the recommendations of the Bhaba Committee set up in 1950 to consolidate the existing corporate laws and to provide a new basis for corporate operation. With the enactment of this legislation in 1956, the Companies Act 1913 was repealed. The Companies Act, 1956, has since then provided the legal framework for corporate entities in India.

Major amendments to the Companies Act, 1956, were made after considering the recommendations of the Sachar Committee by enacting the Companies Amendment Act, 1988. The next major amendment was made by the Companies Amendment Act of 2002 after the report of the high-powered Eradi Committee. Two previous attempts at a comprehensive review of the existing law by introducing Companies Amendment Bill 1993 and 1997 failed as the assent of the Parliament could not be received.

Experts say that the current Bill has political consensus as it addresses almost every issue that facilitates business. And with the just-released World Banks Doing Business Report showing India slipping two ranks since last year to 122, it is high time the Bill gets the assent of Parliament.


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